4 Normative vs. positive theory of regulation Normative theory: provides advice when to regulate Market failure in the case of a natural monopoly, external effects, public goods (non-rivalry, non-excludability) maximization of rents as policy objectives for state intervention BUT: theory does not always explain existing regulations Positive theory: explains the existence of regulations Market for regulation demand exists which politicians answer with a supply of regulations favouring an organized minority, or interest group Capture theory: bureaucrats are sooner or later captured by the industry they are supposed to monitor BUT: Does not explain deregulation Professur für BWL, insb. Internationale Wirtschaft Folie 4

5 Deregulation: further aspects to consider Deregulation as a result of changes within a system: Internal political forces change (BECKER, PELTZMAN) North: relative changes in prizes induce change due to demographic change, change in the stock of knowledge, and change in technology. Deregulation due to external forces: Market aspects (internationalisation of companies, location tournaments and the role of positive demonstration effect of deregulations taking place somewhere else in the world, financial crisis of public sector) Technological dimension (creating competition through new technology, e.g. telecommunication market, leading to pressure for political changes) Political environment (international agreements, e.g. WTO, EU) Professur für BWL, insb. Internationale Wirtschaft Folie 5

6 Agenda 2. The National Market for Electricity in the Member States Professur für BWL, insb. Internationale Wirtschaft Folie 6

10 2.2. Why Deregulate the Market for Electricity? Objectives of EU Energy policy electricity important part Create an internal market in the energy field Increase efficiency in production, transmission, distribution and supply of electricity Reduce prices for consumers and introduce higher standards of service By means of increased competition elimination of price differentials among countries and regions redistribution of existing monopoly rents Thereby reinforce security of supply and the competitiveness of the European economy.. and respect environmental protection Professur für BWL, insb. Internationale Wirtschaft Folie 10

15 3.1. The Beginnings (1990) Directive on price transparency (90/377/EG) Aim: Make electricity prices for industrial end-users more transparent Content: Member States must ensure that gas and electricity undertakings communicate their prices to the Statistical Office of the European Communities Directive on electricity transit (90/547/EG) Aim: Increase opportunities for transfers of electricity by facilitating the transit between high- voltage grids Content: Contracts for transit must be negotiated between the entities responsible for the grids concerned Conditions of transit must comply with the principle of free movement, without endangering security of supply and quality of service Professur für BWL, insb. Internationale Wirtschaft Folie 15

16 3.2. Further Steps Directive 96/92/EC Directive on the Internal Market in Electricity 96/92/ EC (to be effective in 1999) Aim: Establishing an internal market in electricity Ensuring the free movement of electricity Improving security of supply Improving the competitiveness of the European economy and the welfare of the European citizens Establishment of common rules for the generation, transmission, and distribution of electricity Professur für BWL, insb. Internationale Wirtschaft Folie 16

17 3.2 Directive 96/92/EC - Content Generation Authorization procedure: - Criteria are set up by the Member States and must be objective and non-discriminatory - Applications which are conform with the criteria should be authorized Tendering procedure: - Member States set up an inventory of the need for future generating capacity - Selection has to follow objective, transparent, and nondiscriminatory criteria - Independent authority shall carry out organisation, monitoring and control of the procedure Professur für BWL, insb. Internationale Wirtschaft Folie 17

18 Transmission 3.2 Directive 96/92/EC - Content Transport of electricity on the high-voltage systems Independent transmission system operator (TSO) has to ensure non-discrimination in system use between the incumbent and new entrants TSO is responsible for dispatching the generating installations in its area and for determining the use of interconnectors with other systems Criteria for the dispatching must be objective and nondiscriminatory (but: for environmental reasons priority can be given to electricity from renewables) Professur für BWL, insb. Internationale Wirtschaft Folie 18

19 Distribution 3.2 Directive 96/92/EC - Content Transport of electricity on the medium-voltage and low-voltage interconnected systems Independent distribution system operator (DSO) is responsible for maintaining a secure, reliable and efficient electricity distribution system in its area DSO must not discriminate between the system users Member States may impose on distribution companies a public service obligation Professur für BWL, insb. Internationale Wirtschaft Folie 19

20 Unbundling 3.2 Directive 96/92/EC - Content Aimed at avoiding discrimination, cross-subsidization and distortion of competition Integrated companies are obliged to unbundle their different business activities Different possibilities left to the Member States: Proprietary separation of the monopoly activities from the competitive ones: ownership Creation of different companies under a common holding: legal Accounting separation Professur für BWL, insb. Internationale Wirtschaft Folie 20

21 3.2 Directive 96/92/EC - Content Access to the network Negotiated Third Party Access Producers and consumers place supply contracts directly with each other Access and prices are negotiated with the operator Indicative prices must be published by the system operators Independent body for the settlement of disputes is to be established by the Member States Operator may refuse access in case of lack of capacity Professur für BWL, insb. Internationale Wirtschaft Folie 21

22 3.2 Directive 96/92/EC - Content Regulated Third Party Access Producer and consumer place supply contracts directly with each other Prices cannot be negotiated Eligible customers have a right of access on the basis of published tariffs Independent body for the settlement of disputes is to be established by the Member States Single Buyer Responsible of guaranteeing the supply of electricity to the single buyer, on the basis of supply contracts Publishes a non-discriminatory tariff for the use of the transmission and the distribution system Professur für BWL, insb. Internationale Wirtschaft Folie 22

23 3.2 Directive 96/92/EC - Content Market opening Happens gradually By Feb0 3: 33% market opening for customers with a consumption of > 9 GWh Member States are allowed to go for further, including complete liberalization At the latest from 1 July 2007, all Europeans to become eligible Professur für BWL, insb. Internationale Wirtschaft Folie 23

24 3.2 Directive 96/92/EC - Outcome Directive implementation through national plans: common approach but significant heterogeneity Problem: Successful creation of an environment allowing for access of new entrants BUT: no competitive environment as no reduction in the incumbent market shares As design of market organization rules has been less effective Effects on consumer s switching and on final prices in most countries rather limited Professur für BWL, insb. Internationale Wirtschaft Folie 24

27 3.2 Directive 96/92/EC- Remaining Problems Permitted liberalization options too diverging in outcome Transmission capacities are not sufficient to create a single market Several markets exist with different prices Available interconnector capacity and cross border transmission pricing as key issues for the functioning of a real single market The implementation of the directive caused 15 liberalized but separated electricity markets Professur für BWL, insb. Internationale Wirtschaft Folie 27

28 3.2 Directive /54/EC Directive on the Internal Market in Electricity (2003/54/EC), to be effective from 07/04 onwards Key European legislation to establish the Internal Market Amendment to the former Directive Unbundling: minimum standard is the legal separation Third Party Access: negotiated access regime & single buyer has been abolished Each Member State has to establish a regulatory authority in charge for tariff review Monitoring of security of supply Mandatory electricity labeling for fuel mix and for some emission and waste data Professur für BWL, insb. Internationale Wirtschaft Folie 28

30 3.2 Regulation 1228/2003 European Regulators Group Set up in 11/03 as an advisory group of independent national regulatory authorities to assist the Commission in consolidating the Internal Market for electricity and gas Tasks: Facilitate the completion of the internal energy market Help ensure a consistent application in all Member States Provide a transparent platform for co-operation between national regulatory authorities and between these authorities and the Commission Professur für BWL, insb. Internationale Wirtschaft Folie 30

42 3.4. Latest developments Directive 2005/89/EC Directive on the security of electricity supply and infrastructure investment Proposal follows the power cuts in Italy in 2003 Set up an internal framework within which member-states will define general policies on the security of electricity supply compatible with the requirements of a competitive single market for electricity Aims Safeguarding the security of electricity supply Ensure the proper functioning of the EU s internal market for electricity Investment in transportation networks Establish ability to cope with growing demand Professur für BWL, insb. Internationale Wirtschaft Folie 42

45 4.1 Remaining Problems Existing infrastructure for cross border exchange is not utilized to its maximum possible extent/ congestion at border Market structure: markets are still dominated by one or two companies, insufficient degree of price transparency Companies are not fully unbundled Long term purchase arrangements still exist Professur für BWL, insb. Internationale Wirtschaft Folie 45

46 4.2. Future Perspectives Effects of the amendments of the regulatory framework remain uncertain An ongoing process of M&As in Europe will lead to a small group of dominant players issue of concentration is the most important obstacle to the development of more vigorous competition Development of interconnection among markets regional markets are only in their infancy, EU integrated market? Development of energy market consistent with the Community`s sustainablility objectives Growing demand needs more investment in generation Professur für BWL, insb. Internationale Wirtschaft Folie 46

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